Working Paper: NBER ID: w19725
Authors: Geoffrey Heal; Jisung Park
Abstract: Does temperature affect economic performance? Has temperature always affected social welfare through its impact on physical and cognitive function? While many economic studies have explored the indirect links between climate and welfare (e.g. agriculture, conflict, sea-level rise), few address the possibility of direct impacts operating through physiology, despite a deep medical literature documenting the temperature sensitivity of human task performance. This paper attempts a synthesis of these literatures by (1) presenting a microeconomic model of labor supply under thermal stress, and (2) using country-level panel data on temperature and income (1950-2005) to illustrate the potential magnitude of temperature- driven productivity impacts. Using a fixed effects estimation strategy, we find significant temperature sensitivity of per capita income that varies, crucially, with a country's position relative to an optimal temperature zone. Hotter-than- average years are associated with lower output per capita for countries in hot climates and higher output per capita for countries in cold ones: approximately 3%-4% per degree C in both directions. Air-conditioning mediates the adverse impact of hotter years, consistent with the physiological explanation. This more direct causal link between climate and social welfare has important implications for both the economics of climate change and comparative development.
Keywords: Temperature; Economic Performance; Labor Supply; Climate Change; Air Conditioning
JEL Codes: J01; Q54; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Temperature (C29) | Per Capita Income (D31) |
| Hotter-than-average years (Q54) | Per Capita Income in hot climates (D31) |
| Warmer-than-average years (Q54) | Per Capita Income in cold climates (D31) |
| Air Conditioning (L94) | Mitigation of adverse effects of extreme heat (Q54) |
| Temperature-performance relationship (L15) | Differences in productivity levels across countries (O57) |